ESCALADE INC 10-Q

Item 1. FINANCIAL STATEMENTS   ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS   All Amounts in Thousands Except Share Information   October 2, 2021     December 26, 2020     October 3, 2020       (Unaudited)     (Audited)     (Unaudited)   ASSETS                         Current Assets:                         Cash and cash equivalents   $ 6,492     $ 3,505     $ 6,811   Receivables, less allowance of $ 636 ; $ 896 ; and $ 798 ; respectively     68,849       65,280       63,750   Inventories     91,755       72,488       63,738   Prepaid expenses     6,527       4,068       2,580   Prepaid income tax     --       57       --   TOTAL CURRENT ASSETS     173,623       145,398       136,879                             Property, plant and equipment, net     24,000       18,232       16,029   Operating lease right-of-use assets     2,500       1,608       1,271   Intangible assets, net     21,207       22,645       17,739   Goodwill     32,695       32,695       26,749   Other assets     131       127       49   TOTAL ASSETS   $ 254,156     $ 220,705     $ 198,716                             LIABILITIES AND STOCKHOLDERS' EQUITY                         Current Liabilities:                         Current portion of long-term debt   $ 7,143     $ --     $ --   Trade accounts payable     25,071       20,947       32,102   Accrued liabilities     18,100       24,271       18,702   Income tax payable     124       --       1,675   Current operating lease liabilities     990       854       693   TOTAL CURRENT LIABILITIES     51,428       46,072       53,172                             Other Liabilities:                         Long‑term debt     51,874       30,073       --   Deferred income tax liability     4,193       4,193       3,537   Operating lease liabilities     1,493       763       591   Other liabilities     448       448       387   TOTAL LIABILITIES     109,436       81,549       57,687                             Stockholders' Equity:                         Preferred stock:                         Authorized 1,000,000 shares; no par value, none issued                         Common stock:                         Authorized 30,000,000 shares; no par value, issued and outstanding – 13,557,879 ; 13,919,380 ; and 14,169,404 ; shares respectively     13,558       13,919       14,169   Retained earnings     131,162       125,237       126,860   TOTAL STOCKHOLDERS' EQUITY     144,720       139,156       141,029   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 254,156     $ 220,705     $ 198,716     See notes to Consolidated Condensed Financial Statements.   3       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)         Three Months Ended     Nine Months Ended   All Amounts in Thousands Except Per Share Data   October 2, 2021     October 3, 2020     October 2, 2021     October 3, 2020                                     Net sales   $ 81,298     $ 78,069     $ 240,168     $ 198,882                                     Costs and Expenses                                 Cost of products sold     62,992       54,548       179,355       141,911   Selling, administrative and general expenses     10,202       10,374       33,888       29,752   Amortization     432       332       1,438       1,108                                     Operating Income     7,672       12,815       25,487       26,111                                     Other Income (Expense)                                 Interest expense     ( 414 )     ( 44 )     ( 1,035 )     ( 148 ) Other income     68       40       124       108                                     Income Before Income Taxes     7,326       12,811       24,576       26,071                                     Provision for Income Taxes     1,360       2,625       5,042       5,224                                     Net Income   $ 5,966     $ 10,186     $ 19,534     $ 20,847                                     Earnings Per Share Data:                                 Basic earnings per share   $ 0.44     $ 0.72     $ 1.41     $ 1.48   Diluted earnings per share   $ 0.43     $ 0.71     $ 1.40     $ 1.47                                     Dividends declared   $ 0.14     $ 0.140     $ 0.42     $ 0.390     See notes to Consolidated Condensed Financial Statements.   4       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)       Common Stock     Retained           All Amounts in Thousands   Shares     Amount     Earnings     Total                                     Balances at July 11, 2020     14,154     $ 14,154     $ 118,410     $ 132,564                                     Net income                     10,186       10,186   Expense of stock options and restricted stock units                     263       263   Settlement of restricted stock units     15       15       ( 15 )     --   Dividends declared                     ( 1,984 )     ( 1,984 )                                   Balances at October 3, 2020     14,169     $ 14,169     $ 126,860     $ 141,029                                                                       Balances at December 28, 2019     14,215     $ 14,215     $ 111,955     $ 126,170                                     Net income                     20,847       20,847   Expense of stock options and restricted stock units                     756       756   Settlement of restricted stock units     51       51       ( 51 )     --   Issuance of restricted stock awards     35       35       ( 35 )     --   Dividends declared                     ( 5,515 )     ( 5,515 ) Purchase of stock     ( 142 )     ( 142 )     ( 1,184 )     ( 1,326 ) Stock issued to directors as compensation     10       10       87       97                                     Balances at October 3, 2020     14,169     $ 14,169     $ 126,860     $ 141,029               Common Stock     Retained           All Amounts in Thousands   Shares     Amount     Earnings     Total                                     Balances at July 10, 2021     13,779     $ 13,779     $ 131,354     $ 145,133                                     Net income                     5,966       5,966   Expense of stock options and restricted stock units                     229       229   Dividends declared                     ( 1,917 )     ( 1,917 ) Purchase of stock     ( 221 )     ( 221 )     ( 4,470 )     ( 4,691 ) Stock issued to directors as compensation                                                                   Balances at October 2, 2021     13,558     $ 13,558     $ 131,162     $ 144,720                                                                       Balances at December 26, 2020     13,919     $ 13,919     $ 125,237     $ 139,156                                     Net income                     19,534       19,534   Expense of stock options and restricted stock units                     666       666   Exercise of stock options     10       10       134       144   Settlement of restricted stock units     46       46       ( 46 )     --   Dividends declared                     ( 5,804 )     ( 5,804 ) Purchase of stock     ( 423 )     ( 423 )     ( 8,688 )     ( 9,111 ) Stock issued to directors as compensation     6       6       129       135                                     Balances at October 2, 2021     13,558     $ 13,558     $ 131,162     $ 144,720     See notes to Consolidated Condensed Financial Statements.   5       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)       Nine Months Ended   All Amounts in Thousands   October 2, 2021     October 3, 2020                     Operating Activities:                 Net income   $ 19,534     $ 20,847   Depreciation and amortization     3,935       3,252   Provision for doubtful accounts     ( 224 )     394   Stock-based compensation     666       756   Gain on disposal of property and equipment     ( 27 )     ( 2 ) Adjustments necessary to reconcile net income to net cash used by operating activities     ( 26,933 )     ( 14,378 ) Net cash provided (used) by operating activities     ( 3,049 )     10,869                     Investing Activities:                 Purchase of property and equipment     ( 8,281 )     ( 3,064 ) Proceeds from sale of property and equipment     43       3   Payment on note payable related to an acquisition     --       ( 135 ) Net cash used by investing activities     ( 8,238 )     ( 3,196 )                   Financing Activities:                 Proceeds from issuance of long-term debt     192,792       8,493   Payments on long-term debt     ( 163,849 )     ( 8,493 ) Proceeds from exercise of stock options     144       --   Deferred financing fees     ( 33 )     --   Purchase of stock     ( 9,111 )     ( 1,326 ) Cash dividends paid     ( 5,804 )     ( 5,515 ) Director stock compensation     135       97   Net cash provided (used) by financing activities     14,274       ( 6,744 ) Net increase in cash and cash equivalents     2,987       929   Cash and cash equivalents, beginning of period     3,505       5,882   Cash and cash equivalents, end of period   $ 6,492     $ 6,811     See notes to Consolidated Condensed Financial Statements.   6     ESCALADE, INCORPORATED AND SUBSIDIARIES   NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)     Note A – Summary of Significant Accounting Policies   Presentation of Consolidated Condensed Financial Statements – The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for its annual financial reporting. All adjustments that are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. The consolidated condensed balance sheet of the Company as of December 26, 2020 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10 -K annual report for 2020 filed with the Securities and Exchange Commission.       Note B ‑ Seasonal Aspects   The results of operations for the three and nine month periods ended October 2, 2021 and October 3, 2020 are not necessarily indicative of the results to be expected for the full year.       Note C ‑ Inventories   In thousands   October 2, 2021     December 26, 2020     October 3, 2020                             Raw materials   $ 10,160     $ 9,121     $ 8,446   Work in progress     3,873       3,538       4,217   Finished goods     77,722       59,829       51,075       $ 91,755     $ 72,488     $ 63,738         Note D – Fair Values of Financial Instruments   The following methods were used to estimate the fair value of all financial instruments recognized in the accompanying balance sheets at amounts other than fair values.   Cash and Cash Equivalents   Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity.   Long-term Debt   Fair values of long-term debt is estimated based on borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model.   The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with FASB ASC 825 at October 2, 2021, December 26, 2020 and October 3, 2020.   7                 Fair Value Measurements Using   October 2, 2021 In thousands   Carrying Amount     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Financial assets                                 Cash and cash equivalents   $ 6,492     $ 6,492     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 51,874     $ --     $ 51,874     $ --                 Fair Value Measurements Using   December 26, 2020 In thousands   Carrying Amount     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Financial assets                                 Cash and cash equivalents   $ 3,505     $ 3,505     $ --     $ --                                     Financial liabilities                                 Long-term debt   $ 30,073     $ --     $ 30,073     $ --                 Fair Value Measurements Using   October 3, 2020 In thousands   Carrying Amount     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Financial assets                                 Cash and cash equivalents   $ 6,811     $ 6,811     $ --     $ --         Note E – Stock Compensation   The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation .   During the nine months ended October 2, 2021 and pursuant to the 2017 Incentive Plan, in lieu of cash payments of director fees, the Company awarded to certain directors 5,683 shares of common stock. During the nine months ended October 2, 2021, the Company awarded 13,332 restricted stock units to directors and 37,283 restricted stock units to employees. The restricted stock units awarded to directors time vest over two years ( one -half one year from grant date and one -half two years from grant date) provided that the director is still a director of the Company at the vest date. Director restricted stock units are subject to forfeiture, except for termination of services as a result of retirement, death or disability, if on the vesting date the director no longer holds a position with the Company. The 2021 restricted stock units awarded to employees time vest over three years ( one - third one year from grant, one - third two years from grant and one - third three years from grant) provided that the employee is still employed by the Company on the vesting date.   For the three and nine months ended October 2, 2021, the Company recognized stock based compensation expense of $ 229 thousand and $ 666 thousand, respectively compared to stock based compensation expense of $ 263 thousand and $ 756 thousand for the same periods in the prior year. At October 2, 2021 and October 3, 2020, respectively, there was $ 0.9 million and $ 1.2 million in unrecognized stock-based compensation expense related to non-vested stock awards.   8       Note F ‑ Segment Information       For the Three Months Ended October 2, 2021   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 81,298     $ --     $ 81,298   Operating income (loss)     8,087       ( 415 )     7,672   Net income     5,614       352       5,966         As of and for the Nine Months Ended October 2, 2021   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 240,168     $ --     $ 240,168   Operating income (loss)     27,049       ( 1,562 )     25,487   Net income     18,956       578       19,534   Total assets   $ 246,777     $ 7,379     $ 254,156         For the Three Months Ended October 3, 2020   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 78,069     $ --     $ 78,069   Operating income (loss)     13,177       ( 362 )     12,815   Net income     9,554       632       10,186         As of and for the Nine Months Ended October 3, 2020   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 198,882     $ --     $ 198,882   Operating income (loss)     27,640       ( 1,529 )     26,111   Net income     20,017       830       20,847   Total assets   $ 190,309     $ 8,407     $ 198,716         Note G – Dividend Payment   On September 14, 2021, the Company paid a quarterly dividend of $ 0.14 per common share to all shareholders of record on September 7, 2021. The total amount of the dividend was approximately $ 1.9 million and was charged against retained earnings.   On June 8, 2021, the Company paid a quarterly dividend of $ 0.14 per common share to all shareholders of record on June 1, 2021. The total amount of the dividend was approximately $ 1.9 million and was charged against retained earnings.   On March 24, 2021, the Company paid a quarterly dividend of $ 0.14 per common share to all shareholders of record on March 17, 2021 ( the amount was funded to the transfer agent by the Company on March 19, 2021). The total amount of the dividend was approximately $ 1.9 million and was charged against retained earnings.   9       Note H ‑ Earnings Per Share   The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:       Three Months Ended     Nine Months Ended   In thousands     October 2, 2021     October 3, 2020     October 2, 2021     October 3, 2020                                     Weighted average common shares outstanding     13,706       14,128       13,821       14,117   Dilutive effect of stock options and restricted stock units     102       137       102       105   Weighted average common shares outstanding, assuming dilution     13,808       14,265       13,923       14,222     Stock options that are anti-dilutive as to earnings per share and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 2021 and 2020 were 11,900 and 57,569 , respectively.       Note I – New Accounting Standards and Changes in Accounting Principles   With the exception of that discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended October 2, 2021, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10 -K for the fiscal year ended December 26, 2020, that are of significance, or potential significance to the Company.   In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019 - 12, Income Taxes (Topic 740 ): Simplifying Accounting for Income Taxes , which removes certain exceptions to the general principles of Topic 740, Accounting for Income Taxes (“ASC 740” ) and is intended to improve consistency and simplify GAAP in several other areas of ASC 740 by clarifying and amending existing guidance. The Company adopted this standard on December 27, 2020 and the adoption did not have a material impact on its consolidated financial statements.     Note J – Revenue from Contracts with Customers   Revenue Recognition – Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our goods at a point in time based on shipping terms and transfer of title. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue.   Gross-to-net sales adjustments – We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statement of operations. These adjustments are referred to as gross-to-net sales adjustments and primarily fall into one of three categories: returns, warranties and customer allowances.   Returns – The Company records an accrued liability and reduction in sales for estimated product returns based upon historical experience. An accrued liability and reduction in sales is also recorded for approved return authorizations that have been communicated by the customer.   Warranties – Limited warranties are provided on certain products for varying periods. We record an accrued liability and reduction in sales for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and sales in the current year.   10     Customer Allowances – Customer allowances are common practice in the industries in which the Company operates. These agreements are typically in the form of advertising subsidies, volume rebates and catalog allowances and are accounted for as a reduction to gross sales. The Company reviews such allowances on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available.   Disaggregation of Revenue – We generate revenue from the sale of widely recognized sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products. These products are sold through multiple sales channels that include: mass merchants, specialty dealers, key on-line retailers (“E-commerce”) and international. The following table depicts the disaggregation of revenue according to sales channel:       Three Months Ended     Nine Months Ended   All Amounts in Thousands   October 2, 2021     October 3, 2020     October 2, 2021     October 3, 2020                                     Gross Sales by Channel:                                 Mass Merchants   $ 41,792     $ 36,234     $ 93,298     $ 77,418   Specialty Dealers     19,170       21,741       73,347       57,666   E-commerce     25,116       25,172       86,053       78,242   International     2,259       2,637       9,182       6,129   Other     883       598       2,469       1,669   Total Gross Sales     89,220       86,382       264,349       221,124                                     Less: Gross-to-Net Sales Adjustments                                 Returns     1,283       2,117       5,531       5,538   Warranties     590       376       1,703       1,152   Customer Allowances     6,049       5,820       16,947       15,552   Total Gross-to-Net Sales Adjustments     7,922       8,313       24,181       22,242   Total Net Sales   $ 81,298     $ 78,069     $ 240,168     $ 198,882         Note K – Leases   We have operating leases for office, manufacturing and distribution facilities as well as for certain equipment. Our commenced leases have remaining lease terms of 1 year to 6 years. As of October 2, 2021, the Company has not entered into any lease arrangements classified as a finance lease.   We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and operating lease liabilities on our consolidated balance sheet. The Company has elected an accounting policy to not recognize short-term leases ( one year or less) on the balance sheet. The Company also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not need to reassess the following; whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.   11     ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Components of lease expense and other information as follows:       Three Months Ended     Nine Months Ended   All Amounts in Thousands   October 2, 2021     October 3, 2020     October 2, 2021     October 3, 2020                                     Lease Expense                                 Operating Lease Cost   $ 433     $ 197     $ 1,151     $ 610   Short-term Lease Cost     330       137       1,361       411   Variable Lease Cost     101       52       304       169   Total Operating Lease Cost   $ 864       386     $ 2,816     $ 1,190                                     Operating Lease – Operating Cash Flows   $ 434     $ 182     $ 1,050     $ 557   New ROU Assets – Operating Leases   $ 1,189     $ 56     $ 2,329     $ 744     Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:       Nine Months Ended   All Amounts in Thousands   October 2, 2021     October 3, 2020                     Weighted Average Remaining Lease Term – Operating Leases (years)     3.93       2.40   Weighted Average Discount Rate – Operating Leases     5.00 %     5.00 %   Future minimum lease payments under non-cancellable leases as of October 2, 2021 were as follows:   All Amounts in Thousands                   Year 1   $ 325   Year 2     884   Year 3     405   Year 4     336   Year 5     312   Thereafter     486   Total future minimum lease payments     2,748   Less imputed interest     ( 265 ) Total   $ 2,483             Reported as of October 2, 2021         Current operating lease liabilities     990   Long-term operating lease liabilities     1,493   Total   $ 2,483     As of October 2, 2021, we have entered into a lease for additional warehouse and operations which has not yet commenced. Although the location is currently under construction, we do not control the building during construction, and are thus not deemed to be the owner during construction. Amounts in the table above exclude legally binding minimum lease payments for the lease signed but not yet commenced of $ 9.9 million.     Note L – Commitments and Contingencies   The Company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.   12       Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   Forward-Looking Statements   This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to: specific and overall impacts of the COVID-19 global pandemic on Escalade’s financial condition and results of operations; Escalade’s plans and expectations surrounding the transition to its Interim Chief Executive Officer and all potential related effects and consequences; the impact of competitive products and pricing; product demand and market acceptance; new product development; Escalade’s ability to achieve its business objectives, especially with respect to its Sporting Goods business on which it has chosen to focus; Escalade’s ability to successfully achieve the anticipated results of strategic transactions, including the integration of the operations of acquired assets and businesses and of divestitures or discontinuances of certain operations, assets, brands, and products; the continuation and development of key customer, supplier, licensing and other business relationships; Escalade’s ability to develop and implement our own direct to consumer e-commerce distribution channel; Escalade’s ability to successfully negotiate the shifting retail environment and changes in consumer buying habits; the financial health of our customers; disruptions or delays in our business operations, including without limitation disruptions or delays in our supply chain, arising from political unrest, war, labor strikes, natural disasters, public health crises such as the coronavirus pandemic, and other events and circumstances beyond our control; Escalade’s ability to control costs; Escalade’s ability to successfully implement actions to lessen the potential impacts of tariffs and other trade restrictions applicable to our products and raw materials, including impacts on the costs of producing our goods, importing products and materials into our markets for sale, and on the pricing of our products; general economic conditions; fluctuation in operating results; changes in foreign currency exchange rates; changes in the securities markets; Escalade’s ability to obtain financing and to maintain compliance with the terms of such financing; the availability, integration and effective operation of information systems and other technology, and the potential interruption of such systems or technology; risks related to data security of privacy breaches; and other risks detailed from time to time in Escalade’s filings with the Securities and Exchange Commission. Escalade’s future financial performance could differ materially from the expectations of management contained herein. Escalade undertakes no obligation to release revisions to these forward-looking statements after the date of this report.   Overview   Escalade, Incorporated (Escalade, the Company, we, us or our) is focused on growing its Sporting Goods business through organic growth of existing categories, strategic acquisitions, and new product development. The Sporting Goods business competes in a variety of categories including basketball goals, archery, pickleball, billiards, indoor and outdoor game recreation, water sports, and fitness products. Strong brands and on-going investment in product development provide a solid foundation for building customer loyalty and continued growth.   Within the sporting goods industry, the Company has successfully built a robust market presence in several niche markets. This strategy is heavily dependent on expanding our customer base, barriers to entry, strong brands, excellent customer service and a commitment to innovation. A key strategic advantage is the Company’s established relationships with major customers that allow the Company to bring new products to market in a cost effective manner while maintaining a diversified portfolio of products to meet the demands of consumers. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enables it to be a low cost supplier.   To enhance growth opportunities, the Company has focused on promoting new product innovation and development and brand marketing. In addition, the Company has embarked on a strategy of acquiring companies or product lines that complement or expand the Company's existing product lines or provide expansion into new or emerging categories in sporting goods. A key objective is the acquisition of product lines with barriers to entry that the Company can take to market through its established distribution channels or through new market channels. Significant synergies are achieved through assimilation of acquired product lines into the existing Company structure. The Company also sometimes divests or discontinues certain operations, assets, brands, and products that do not perform to the Company's expectations or no longer fit with the Company's strategic objectives.   Management believes that key indicators in measuring the success of these strategies are revenue growth, earnings growth, new product introductions, and the expansion of channels of distribution.   13     COVID-19 Pandemic   The novel coronavirus (COVID-19) pandemic continued to affect the Company’s operations through the third quarter of 2021 and may continue to do so indefinitely thereafter. Increased customer demand the Company experienced through 2020, likely caused in part by consumers remaining home to limit the spread of COVID-19, has carried over into the 2021 fiscal year. While the Company continues to meet these demands through accelerated ordering schedules and increased inventory, a substantial decrease in customer demand or slower payments by the Company’s mass merchants, specialty dealers or other customers could adversely impact the Company’s liquidity. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, manufacturing, distribution, marketing and sales operations, customer and consumer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain. In particular, uncertainty concerning the ongoing severity of the pandemic, potential government actions in response to the pandemic, the length of time it takes for normal economic operating conditions to resume, and potential changes in consumer habits following the lifting of COVID restrictions, all contribute to a volatile environment for conducting business.   Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the period ended October 2, 2021 are not necessarily indicative of the results to be expected for fiscal year 2021. Management cannot predict the full impact of the COVID-19 pandemic on the Company’s sales channels, supply chain, manufacturing and distribution nor to economic conditions generally, including the effects on consumer spending. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends.   Results of Operations The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:       Three Months Ended     Nine Months Ended       October 2, 2021     October 3, 2020     October 2, 2021     October 3, 2020   Net revenue     100.0 %     100.0 %     100.0 %     100.0 % Cost of products sold     77.5 %     69.9 %     74.7 %     71.4 % Gross margin     22.5 %     30.1 %     25.3 %     28.6 % Selling, administrative and general expenses     12.6 %     13.3 %     14.1 %     15.0 % Amortization     0.5 %     0.4 %     0.6 %     0.5 % Operating income     9.4 %     16.4 %     10.6 %     13.1 %   Revenue and Gross Margin Sales increased by 4.1% for the third quarter of 2021, compared with the same period in the prior year. The increase in sales was driven by continued demand for our products, primarily in the archery and games product lines. For the first nine months of 2021, sales were up 20.8% compared to prior year.   The overall gross margin percentage decreased to 22.5% for the third quarter of 2021, compared to 30.1% for 2020. Gross margin was negatively impacted by higher transportation expenses, raw material costs, currency exchange rates, increased wage pressure, and inventory handling costs.   Gross margin percentage decreased to 25.3% for the first nine months of 2021, compared to 28.6% for the same period in the prior year.   Selling, General and Administrative Expenses Selling, general and administrative expenses (SG&A) were $10.2 million for the third quarter of 2021 compared to $10.4 million for the same period in the prior year, a decrease of $0.2 million or 1.7%. SG&A as a percent of sales is 12.6% for the third quarter of 2021 compared with 13.3% for the same period in the prior year. For the first nine months of 2021, SG&A were $33.9 million compared to $29.8 million for the same period in 2020, an increase of $4.1 million or 13.9%. As a percent of sales, SG&A is 14.1% for the first nine months of 2021 compared with 15.0% for the same period in the prior year.   Provision for Income Taxes The effective tax rate for the first nine months of 2021 was 20.5% compared to 20.0% for the same period last year.   14     Financial Condition and Liquidity Total debt at the end of the first nine months of 2021 was $59.0 million, an increase of $28.9 million from December 26, 2020. The following schedule summarizes the Company’s total debt:   In thousands   October 2, 2021     December 26, 2020     October 3, 2020                             Current portion of long-term debt   $ 7,143     $ --     $ --   Long term debt   $ 51,874     $ 30,073     $ --     As a percentage of stockholders’ equity, total debt was 40.8%, 21.6% and zero at October 2, 2021, December 26, 2020, and October 3, 2020 respectively.   On July 7, 2021, the Company and its wholly owned subsidiary, Indian Industries, Inc. (“Indian”) entered into the Fourth Amendment dated as of July 7, 2021 (the “Fourth Amendment”) to the 2019 Restated Credit Agreement dated as of January 21, 2019 among the Company, Indian, each of their domestic subsidiaries, and Chase, as Administrative Agent and as Lender (the “Lender”). Under the terms of the Fourth Amendment, the Lender extended a $50.0 million term loan to the Company and reduced the maximum availability under the senior revolving credit facility from $75.0 million to $50.0 million. The maturity date of the term loan is July 7, 2026 and the maturity date of the revolving credit facility likewise was extended to July 7, 2026. The Company may prepay the revolving credit facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Company’s indebtedness under the Credit Agreement continues to be collateralized by liens on all of the present and future equity of each of the Company’s domestic subsidiaries and substantially all of the assets of the Company (excluding real estate).   The Company funds working capital requirements, shareholder dividends, and stock repurchases through operating cash flows and revolving credit agreements with its bank. The Company expects to have access to adequate levels of revolving credit to meet growth needs.   Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not Required.   15